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Gold Homing in on Long-term Gold/Dow Ratio

Commodities / Gold & Silver 2009 Feb 23, 2009 - 06:33 AM GMT

By: Mark_OByrne

Commodities Best Financial Markets Analysis ArticleGold has given up some of last’s weeks very large gains and is down 0.6% after Asian and in early European trading. With gold up some 13% so far in 2009, some correction and consolidation may be necessary prior to overcoming resistance at $1,000/oz.


The inverse correlation between stock markets and precious metals was seen again last week as gold and silver surged by over 6% last week while most major stock markets were down by some 6% (S&P 500 was down by 6.8%). This inverse correlation looks set to continue for the foreseeable future and as has happened in other stock bear markets/ gold bull markets, the Dow/Gold ratio looks set to retest lows seen in 1933 and 1980.

As can be seen in the above chart featured in this week’s Economist, the Dow/Gold Ratio has been falling sharply since 2000 when the Dow Jones was over 13,000 and gold at some $260/oz. Since then gold has risen to nearly $1,000/oz and the Dow Jones has fallen to 7365. Thus the ratio is now just above 7:1. One ounce of gold can buy seven units of the DJIA.

Given that the financial and economic conditions today are far worse than in 1980 and arguably as bad as they were in the early 1930’s (as warned of by Soros and Volcker over the weekend), it seems extremely likely that the Dow/Gold ratio will again reach a low in this cycle around the 1:1 or 2:1 level.

This would mean that gold could reach it’s inflation adjusted high in 1980 of $2,400/oz and the Dow Jones fall to as low as 2,400 or 4,800.

Given the degree of money printing and credit creation we believe that soon deflation will abate and will be superceded by virulent inflationary pressures. This could lead to a Dow/Gold ratio of 1:1 or 2:1 at higher levels ( the DJIA at 5000 and gold at $5000/oz or the DJIA at 6000 and gold at $3,000/oz) .

By Mark O'Byrne, Executive Director

Gold Investments
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Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

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